Vildirect: IncomeTax-caselaws-1998-VIL-109-ITAT-CHN

1998-VIL-109-ITAT-CHN

Equivalent Citation: ITD 070, 279, TTJ 065, 826,

Income Tax Appellate Tribunal COCHIN

Date: 27.03.1998

SMT. TC USHA.

DEPUTY COMMISSIONER OF INCOME-TAX

BENCH

Member(s) : T. A. BUKTE., M. M. CHERIAN.

JUDGMENT

Per M. M. Cherian, Accountant Member - This appeal has been filed by the assessee, Smt. T. C. Usha against the order passed by the Commissioner of Income-tax under section 263 of the Income-tax Act for the assessment year 1989-90.

2. The assessee is an individual deriving income mainly from the business as a cashew exporter. She is also deriving income from transport business and from sale of electrical goods. For the assessment year 1989-90 the assessment was completed under section 143(3) of the Income-tax Act on a total income of Rs. 5,44,040. Later, the Commissioner felt that the assessment was erroneous and prejudicial to the interests of Revenue and on that view he passed an order under section 263. According to the Commissioner the assessment was erroneous in regard to the following issues :

(i) The interest on fixed deposits with banks was assessed as the assessee's income from 'business' whereas it should have been assessed under the head 'Other sources'.

(ii) While arriving at the proportionate business profit for working out the relief under section 80HHC processing charges were not included in the total turnover which resulted in excess deduction. The Commissioner of Income-tax set aside the assessment with direction to the Assessing Officer to assess the interest on bank deposits as income under the head 'Other sources' and to include the processing charges in the total turnover in computing the relief under section 80HHC. The assessee is in appeal before the Tribunal challenging the order passed by the Commissioner of Income-tax.

3. The first ground raised by the assessee in this appeal is that the Commissioner of Income-tax was not justified in holding that interest on bank deposits was assessable as income under the head 'Other sources' and not as income from business. On behalf of the assessee, Shri K. L. Kolathu, C.A., submitted before us that the assessee was depositing in banks the surplus business funds not immediately required for business purposes. According to the learned representative, the deposits originated from the business profit and hence the interest received on the term deposits had a direct nexus with the business profit and the same had been treated rightly in the assessment as business income. He stated that the assessee was showing the bank deposits under current assets in the balance sheet which would mean that the deposits constituted a trading asset or circulating capital and not investment as such. The assessee was offering the bank deposits as collateral security for opening letter of credit and in that sense the deposits were closely connected with the business, Shri Kolathu contended. The learned representative also relied on the decision of the Madras High Court in the case of CIT v. Madras Refineries Ltd. [1997] 228 ITR 354 for the proposition that bank interest on funds not immediately required for business purpose, was assessable as business income and not as income from other sources. Reliance was also placed on the decisions in CIT v. Tirupati Woollen Mills Ltd. [1992] 193 ITR 252 (Cal.), CIT v. Tamil Nadu Dairy Development Corpn. Ltd. [1995] 216 ITR 535 and CIT v. Maharashtra Electrosmelt Ltd. [1995] 214 ITR 489 / 79 Taxman 264 (Bom.). It was the contention of the learned representative that there was no error in treating the interest as business income eligible for the deduction under section 80HHC and so the Commissioner of Income-tax was not justified in directing the Assessing Officer to assess the interest as income under the head 'Other sources'.

4. On behalf of the Revenue, Shri Shaji P. Jacob, departmental representative, supported the order of the Commissioner of Income-tax and submitted that in the assessment order the Assessing Officer accepted the assessee's statement showing the interest receipt as part of the business income without considering the fact that interest was received on term deposits with banks and thus the order passed by him was erroneous. It was also prejudicial to the interests of Revenue as the assessee had been granted excess deduction under section 80HHC by including bank interest in the profit of the business, the learned departmental representative submitted. It was pointed out that the assessee had been crediting the interest on bank deposits in the profit of business and so by not considering the interest separately as income from other sources, relief under section 80HHC also happened to be wrongly allowed on the bank interest. The learned departmental representative submitted that under section 80HHC deduction is allowable only on profit derived from the export of specified goods and merchandise. He further stated that apart from the export of cashew the assessee was deriving income from transport business and also from the sale of electrical goods, and so it would not be correct to say that the bank deposits had come from the surplus funds of the export business. He also relied on the decision of the Kerala High Court in the case of Collis Line (P.) Ltd. v. ITO [1982] 135 ITR 390 and the decision of the Patna High Court in the case of Bokaro Steel Ltd. v. CIT (No. 2) [1988] 170 ITR 545 for the submission on that interest received on the surplus money kept in term deposits in banks was not income from any business,much less income derived from export of specified goods to become eligible for the deduction under section 80HHC. According to the departmental representative, it was the mistake committed by the Assessing Officer in including the interest in the export profit and allowing relief under section 80HHC that was set right by the Commissioner in the revision order.

5. It is not disputed that interest of Rs. 2,40,787 was earned on the term deposit with banks. The assessee was making the fixed deposits in banks when the funds were not readily required for the purpose of the business. Though the bank deposits are said to have been offered as collateral security for raising letter of credit, it is not the claim that the assessee was under any compulsion to keep surplus funds in the term deposits for carrying on the export business. In the case of Collis Lines (P.) Ltd. (supra) the Kerala High Court held that where money was invested in a bank by the assessee, a shipping company, because the money was lying idle and it was found safer and wiser to put it in a bank, the interest earned on the deposit was incidental to the main purpose of the deposit, which was safe keeping and not earning of profits, and therefore the interest earned could not be said to be received in the course of the business so as to make it part of the profits and gains of the assessee's business. The Court held that interest on the bank deposit was assessable as income from other sources. In the case of Bokaro Steel Ltd. (supra) the Patna High Court also held that interest received by the assessee on short term deposits with banks constituted income assessable under section 56 of the Income-tax Act as income from other sources. In view of the above decisions, we hold that the Assessing Officer had erred in treating the interest on bank deposit as business income. The fact that the assessee had credited the interest in the profit of the business would not charge the character of income. Merely because the assessee was showing the deposits as current assets, it would not be correct to consider the deposits as circulating capital and not as investment. The fact that the investments were made in term deposits would show that the investments were made out of the surplus funds which the assessee did not want in her business. In the case of Madras Refineries Ltd. (supra) relied on by the assessee's representative, the term deposits had been accepted by the Revenue as capital employed in the business and included the same in the capital base for the purpose of relief under section 80J of the Income-tax Act. The High Court held that if the deposits made by the assessee in the bank was capital employed, that would become part of the capital of the new industrial undertaking and that any income earned by the capital employed would automatically become the business income of the assessee and that it could not be treated as income earned from 'other sources'. In the present case, there is no finding by the Assessing Officer and the CIT (Appeals) that the deposit made by the assessee was capital employed in the business and in that sense the decision relied on by the learned representative is distinguishable on facts. In the other case of Tirupati Woollen Mills Ltd. (supra) relied on by the learned representative there was the finding of the Tribunal that interest arose from utilisation of the commercial assets in the form of surplus funds. It was in view of that finding of fact that the High Court held that interest was part of the business income arising from the utilisation of the commercial assets. In this context, we may refer to the following observation of the Supreme Court in Tuticorin Alkali Chemicals & Fertilisers Ltd. v. CIT [1997] 227 ITR 172 / 93 Taxman 502 :

"Interest income is always of a revenue nature, unless it is received by way of damages or compensation. If a person borrows money for business purposes but utilises that money to earn interest, however temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. He may or may not discharge his liability to pay interest with this income. Merely because it was utilised to repay the interest on the loan taken by the assessee, it did not cease to be his income. When the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law, and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Income-tax Act."

6. In this context, we find it necessary to consider the background in which the question assumes importance as to whether the interest on bank deposit is business income or not. The assessee is eligible for the relief under section 80HHC on the profit derived from the export of cashew. Section 80HHC provides that where an assessee is engaged in the business of export out of India of any goods or merchandise to which the section applies, there shall be allowed in computing the total income of the assessee a deduction of the profits derived by the assessee from the export of such goods or merchandise. The important question is not whether the interest on bank deposit is profit of the business or not; rather the more important question is whether interest on bank deposit is profit derived by the assessee from the export of specified goods or merchandise. In the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 the Supreme Court considered the meaning of the expression "derived from the business" in contrast with the expression "attributable to the business". The Court made the following observations :

"As regards the aspect emerging from the expression 'attributable to' occurring in the business of the specified industry (here generation and distribution of electricity) on which the Learned Solicitor-General relied, it will be pertinent to observe that the Legislature has deliberately used the expression 'attributable to' and not the expression 'derived from'. Had the expression 'derived from' been used, it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the Legislature wanted to give a restricted meaning in the manner suggested by the Learned Solicitor-General, it has used the expression 'derived from', as for instance, in section 80J. In our view, since the expression of wider import, namely, 'attributable to', has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity."

In the case of Cement Distributors Ltd. [1994] 208 ITR 355 the Delhi High Court considered the meaning of the expression 'derived from' in connection with the relief under sections 80HH and 80J and observed as under :

"The word 'derived' has to be assigned a restricted meaning as compared to the words 'attributable to' or 'referable to' and, therefore, to avail of a rebate under section 80HH, an assessee must establish that he has derived profits or gains from the industrial undertaking. In other words, the industrial undertaking must itself be the source of that profit and gain and it is not sufficient if a commercial connection is established between the profits and gains earned and the industrial undertaking."

In the case of CIT v. Buildwell Assam (P.) Ltd. [1996] 220 ITR 577 the Gauhati High Court held that an assessee is entitled to get rebate under section 80HHC only to the extent of any profits or gains derived from an industrial undertaking and if the assessee carried on some other business, no deduction was available on such profits or gains. In the light of these decisions, we have to see whether interest on term deposits with banks is profit derived from the export of such goods or merchandise as mentioned in section 80HHC. We do not agree with the learned representative that interest is 'profit derived from the export of any goods or merchandise'. Interest is, on the other hand, income derived from the term deposits with the banks. The direct source of the interest is the bank deposit and not the export business. Interest derived from the bank deposit was not includible as the profit of the export business for the purpose of the deduction under section 80HHC. The Commissioner of Income-tax was thus justified in directing the Assessing Officer to exclude the bank interest from the profit of the business and treat it separately as income from other sources. We accordingly uphold the direction given by the Commissioner.

7. In the next ground in this appeal the assessee is aggrieved with the direction given by the Commissioner to include the processing charges of Rs. 12,91,840 in the total turnover for the purpose of computing the deduction allowable under section 80HHC. The assessee was collecting charges from other concerns for processing their raw-nuts. The assessee's claim was that though the processing charges formed part of the business income, the same was not to be included in the total turnover while working out the deduction under section 80HHC. The Commissioner of Income-tax did not accept the assessee's claim and held that the processing charges should be included in the turnover when the same was included in the business profit and directed the Assessing Officer accordingly.

8. On behalf of the assessee the learned representative Shri Kolathu submitted that in the total turnover only the sale price was includible whereas in the charges collected for processing the cashew nuts belonging to other parties there was no sale of goods involved. Relying on the decision of the Supreme Court in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 / 22 Taxman 11 he argued that "turnover" means total amount set out in the bill of sale as consideration for sale or purchase of goods. It was contended that in processing the cashew nuts on job work basis, there was no sale or purchase of goods involved and so the processing charges were not includible in the total turnover. He also placed reliance on the Circular No. 564 issued by the Central Board on 5-7-1990. In that circular it is clarified that domestic turnover would consist of only sale of goods or merchandise. According to the learned representative, the turnover criterion is adopted in section 80HHC in a limited sense just for apportionment of profit relatable to exports and not for reducing the benefit under section 80HHC(1). The learned representative of the assessee also relied on various decisions of the Tribunal in Salgaocar Mining Industries Ltd. v. Dy. CIT [1997] 61 ITD 105 (Pune), Nathani Steels Ltd. v. Dy. CIT [1996] 57 ITD 584 (Bom.) and Ashwini Kumar Consultants (P.) Ltd. v. Dy. CIT [1993] 47 ITD 1 (Delhi) for the contention that processing charges were not includible in the total turnover and so the direction given by the Commissioner was not in accordance with law.

9. Per contra, the departmental representative, Shri Shaji P. Jacob submitted that the processing charges of Rs. 12,91,840 collected by the assessee from the sister concerns were includible in the business profit and so for arriving at the profit derived from export business on a proportionate basis, in the denominator of total turnover, processing charges were to be included. It was stated that the calculation made by the Assessing Officer without including the processing charges in the total turnover was a mistake and it was that mistake which was set right by the Commissioner of Income-tax in his order under section 263. He strongly contended that the direction given by the Commissioner of Income-tax in the revision order was in accordance with law and required no interference.

10. As already stated, the assessee is entitled to the deduction under section 80HHC on the profit derived from the export of cashew. The assessee had claimed the deduction on the entire profit of the business including the processing charges of Rs. 12,91,840 collected from sister concerns. The proportion was worked out on the basis of the export turnover to the total turnover. In the total turnover the assessee had not included the processing charges for the reason that such charges did not partake of the character of sale proceeds to qualify as 'turnover'. In the impugned order the Commissioner has given direction to include the processing charges also in the total turnover for the reason that if the processing charges were excluded from the denominator, and at the same time included in the profits of the business, the profit from export business worked out on that basis would not be the correct figure and that it would give only a distorted picture of the export profit eligible for the deduction under section 80HHC. It may be noted that there was no definition of total turnover in section 80HHC as applicable for the assessment year 1989-90. Even though there is a definition in clause (ba) of the Explanation below section 80HHC introduced by Finance (No. 2) Act, 1994 with retrospective effect from 1-4-1987, that only provides that 'total turnover' does not include freight or insurance attributable to the transport of the goods or merchandise Customs Station. That definition does not help in deciding whether processing charges could be considered as part of the turnover for the purpose of working out the profit derived from export in accordance with the provisions of section 80HHC(3)(a). In the case of Salgaocar Mining Industries Ltd. (supra) relied on by the learned representative of the assessee, the Pune Bench of the Tribunal held that service charges could not be included in the 'turnover'. In that case it was observed as under :

"The combined reading of clauses (b) and (ba) to the Explanation does not show that it will include anything which has no nexus with the sale proceeds. The present case was concerned with the receipts having no connection with the goods sold. These were the charges against the services rendered by the assessee in respect of goods belonging to other parties. It would therefore be too extreme to include such service charges with the meaning of turnover."

The Bombay Bench of the Tribunal also has taken the same view in Nathani Steels Ltd.'s case (supra). In that case the assessee had earned commission, which had no nexus with the export business. The finding of the Tribunal on the question of inclusion of the commission in the turnover was as under :

"The commission earned in the instant case by the assessee could not be treated as profits from exports. Therefore it was neither includible in the profits of the assessee from export nor in the total turnover of the assessee for the purpose of computing the deduction under section 80HHC. It is only the profits from exports which are to be computed for the purpose of deduction under section 80HHC and not any business income."

In that case the Tribunal directed the Assessing Officer to recompute the deduction after excluding the commission from the profits as well as from the turnover of the assessee-company. The decision taken by this Tribunal in the case of Smt. Subhadra Ravi [IT Appeal No. 430 (Coch.) of 1992 dated 31-10-1997] also is to the effect that it is only the profits from exports which are to be considered for the purpose of working out the deduction under section 80HHC, on a proportionate basis. Though the learned counsel for the assessee has also referred to another decision of the Delhi Bench of the Tribunal in Ashwani Kumar Consultant (P.) Ltd.'s case (supra), we find that it is distinguishable on facts. In that case the issue was whether the assessee was ineligible for the deduction under section 80HHC when it had suffered a loss on its export business. The Tribunal held that as the Revenue had failed to object to the extent of the relief allowed by the Assessing Officer, deduction allowed by the Assessing Officer had to be sustained.

11. In the present case the Commissioner of Income-tax has directed the Assessing Officer to include the processing charges collected in the total turnover while working out the profit derived from the export business for the purpose of relief under section 80HHC. Though we agree with the learned counsel that processing charges are not to be included in the total turnover our finding is that, not only in the total turnover but even in the profits of the business processing charges are not to be included while working out the deduction under section 80HHC. We accordingly find it necessary to modify the order of the Commissioner and direct the Assessing Officer to exclude the processing charges from the profits of the business as also from the total turnover while computing the relief under section 80HHC.

12. We are aware of the fact that this appeal has been filed by the assessee and that the assessee should not be in a worse position regarding the computation of the deduction under section 80HHC after giving effect to this order. Hence, we make it clear that if the deduction under section 80HHC as worked out in accordance with our direction excluding the processing charges from the profits of the business as also from the total turnover, the eligible deduction will not be lower than the figure as worked out in accordance with the direction of the Commissioner. This is only regarding the computation of the deduction under section 80HHC with reference to the processing charges collected from the other parties.

13. In the result, this appeal by the assessee is treated as partly allowed (sic).

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